Higher interest rates in European periphery

Bond yields in the European periphery inched up this past week, while those in the core countries were under downward pressure. Equity markets were affected by varying macroeconomic data and a renewed dip in oil prices.

At the same time, the flight to safer havens played into the hands of the bond markets in European core countries, and Germany’s 10-year yield dipped below 0.1% for the first time in a year. Ben Steinebach Head of Investment Strategy

Political changes in Spain and Portugal and tense negotiations between Greece and its creditors slightly drove up bond yields in these countries and in Italy. The United Kingdom’s upcoming referendum on a Brexit also played a background role. At the same time, the flight to safer havens played into the hands of the bond markets in European core countries, and Germany’s 10-year yield dipped below 0.1% for the first time in a year. As a result of these two developments, the spread with Europe’s peripheral countries widened.

The macroeconomic indicators announced last week varied slightly. The United States saw a 215,000 increase in the number of jobs in March, somewhat better than expected. Unemployment edged up from 4.9% of the country’s workforce to 5%. This isn’t necessarily bad, as it was the result a higher number of people joining the labour market. The mood among purchasing managers was satisfying. In the industrial sector, the indices in most countries were upwards of 50, the boundary between expected contraction and expected growth. In Europe’s services sector, the indices fell slightly, yet remained well above 50, while the United States saw an increase to comparable levels. New data on Germany’s industry disappointed: both production and order intake declined in February, although the data for January were adjusted slightly upwards. Global equity markets were barely affected by macroeconomic data, but sagged under the weight of renewed pressure on oil prices. In Europe this was compounded by upward pressure on the euro against the dollar. Equity markets in the United States fell by an average of 1.5% and the average declines in continental Europe were steeper, with extremes of up to 3.6% in Spain and 5.4% in Italy.

Central banks maintain easing policy

Both the US Federal Reserve (the Fed) and the European Central Bank (ECB) indicated that they would not let up on their easing policy. The aborted acquisition of Allergan by Pfizer took the equity markets by surprise. The minutes of the Fed’s meeting state that the central bank is taking the uncertain international environment into account in its policy and will therefore raise the Fed funds rate at a more moderate pace. At a forum discussion including current Fed Chair Janet Yellen and her predecessors Ben Bernanke, Alan Greenspan and Paul Volcker, Ms Yellen confirmed this position. In Frankfurt, chief economist Peter Praet and Board member Benoit Couré of the ECB emphasised that the relaxed policy would be continued. They said that without this policy Europe’s inflation rate would have been much lower than the -0.1% reached in March. A much lower interest rate is not expected, and Mr Praet indicated that a slightly different mixture would be the more obvious course for the future. This means policy will focus more on directly stimulating lending (by upping the intensity of the government bond buying programme or increasing capital injections). Under these circumstances, activity on the primary market for corporate bonds remains very strong. The ECB’s enormous demand for high-quality paper is causing investors to seek out other segments of the market. For example, the debt-laden subsidiary of French cable and telecoms firm Altice did not have any difficulty placing EUR 5 billion. The big news on the equity market was the aborted takeover of Allergan by Pfizer (for USD 160 billion). Apparently this acquisition only would have been profitable for Pfizer thanks to Allergan’s low Irish corporate tax. After the US government legislated this possibility out of existence, Pfizer decided to call off the transaction. Global equity markets were under pressure due to slightly decreasing oil prices. Banks’ share prices suffered the biggest losses. In this light, the decline of the AEX wasn’t that bad, also given the larger losses on some other European markets. The Dutch leading index closed off Thursday at 428.73 points, 1.3% lower than the previous Friday. On Friday morning, the index rose to upwards of 430 points.

Cautious start to first-quarter results season

The first-quarter results season will be kicked off on Monday by aluminium producer Alcoa. Many macroeconomic indicators are also expected, the most notable of which is China’s economic growth in the first quarter. In addition to Alcoa, a few large American banks – Wells Fargo, Bank of America and JP Morgan Chase – are expected to publish their results, followed by a flood of other companies in the following weeks. On the macroeconomic front, we are looking forward to the publication of March inflation data in several countries (the European Union as a whole and Italy, Germany, the United Kingdom, France, China and the United States). In addition, we will also see retail sales figures for the United States and the Netherlands and car sales figures for the EU. Data on industrial production will also be published in the EU, the US and in Italy. In the US, the University of Michigan will publish a first estimate of consumer confidence in April. And China will announce a series of data on Friday. In addition to economic growth in the first quarter, this includes retail sales figures, industrial production and capital expenditure. This will give an indication of how the Chinese economy fared in the quarter that started off so turbulently.

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Ben Steinebach

Head of Investment Strategy

Ben Steinebach graduated with a degree in General Economics, specialising in macroeconomics, international economic affairs and public finance. He held various positions in the financial industry before joining MeesPierson in 1999. Ben has been Head of Investment Strategy at ABN AMRO since 2010.